Tuesday, November 8, 2011

Income Inequality - Envy or Issue?

The rich are getting richer and the poor are getting poorer! OH NO! Oh, wait. What does that even mean? Does this mean that Bob got a raise and Joe got a demotion? Actually, no. Here's what this line means. It means that the income bracket represented by Bob made more money while the income bracket that Joe once belonged to and is now populated by a new generation of Joe's has a lower net worth.

Let's take this a step at a time. When people say the rich are getting richer, they aren't actually talking about individuals. They're talking about a range of wealth holders that are completely different from the wealth holders from the last time they made this proclamation. Instead of talking about Bob gettting richer, you're talking about the cumulative wealth of those people who make up a certain percentage of wealth holders without taking into account that these may or may not be the same INDIVIDUALS from the most recent survey. At the bottom part of the spectrum, these poor who keep getting poorer there are two things that aren't accounted for. First, again, is the income and wealth mobility factor, that the people who were poor at one point may not be poor today. That is that people who start off their adult lives as poor, with extremely low to negative net worths (i.e. people graduating from college with substantial student loan debts) do not remain poor, but instead work themselves up through different levels of the wealth spectrum. Many will in fact rise and fall across this spectrum throughout their lives. Second is the concept of quality of life. Our economy has for years been a consumption economy. People consume more than they can presently afford, wracking up debt for things that were not too long ago considered luxuries. Today, these very same luxuries are taken for granted by many of even the poorest of our countries citizens.

Let's look at the facts. These reports talking about the poor getting poorer only measure one thing - Net Worth. Net Worth is the total value of everything you own subtracted by the total amount of your debt. So, for example. If you are a recent college graduate with $40,000 in student loan debt, $5,000 in credit card debt, no home, a beater car and a basic wardrobe and no job, you're Net Worth is probably less then -$40,000. This would put you in the group of the poorest people in America. Now, let's assume you bought a home in 2006 for $500,000. That home today is worth $400,000. You also have student loans of $50,000 and credit card debt of $5,000. You have a job that pays all of your bills as they become due grossing about $120,000 per year. According to this study, you're poorer than that recent college graduate. You're actually lower on the spectrum than a person who works at Wal Mart, rents an apartment, and has no student loans and only minimal credit card debt.

From a standard of living stand-point in this country many of the poorest people in this country are actually much better off than people in the same category were a generation ago. Technology advances and economic competition have driven down the prices of many things that were once luxuries. Many of the poorest people in this country own microwaves, tvs, automobiles, and have access to clean water, air conditioning, medical care, and free education.

We do have a serious problem in this country with people living in relative poverty. Too many people survive only with the assistance of government handouts and food subsidies. Instead of solving the problem, though, I fear that government's "war on poverty" has only made the problem worse. That, however, is a discussion for another day.

If there is one take-away here it is that you should look beyond the headlines. Yes, the rich get richer, but quite frankly, so do the poor, but with each generation, we have a new batch of poor. With the constantly rising cost of education, and the devaluation of currency, these new poor, these future producers start from a deeper financial hole than the previous generation.